Gold miners come clean on costs after lost 6 years

The gold-mining industry, which has underperformed the precious metal for each of the past six years, is pledging to report costs more accurately as part of its efforts to win back investor confidence.

Barrick Gold Corp. and Goldcorp Inc., the two biggest producers by market value, have begun reporting “all-in sustaining costs” for the first time. The new measure averaged $941 an ounce between the two companies in the fourth quarter. That’s 50 percent higher than the $626 average so-called cash cost they disclosed in the preceding three months.

The largest gold companies are seeking to lure investors back to the $300 billion industry after a string of money-losing multibillion-dollar takeovers and over-budget projects. Barrick and its competitors are vowing to focus on margins and to get a grip on soaring production costs, rather than boosting output.

Gold producers “have really done themselves a huge disservice by effectively walking around for the last 12 years promoting the gross margin as opposed to the net or the operating margin,” said Joseph Wickwire, the Boston-based manager of Fidelity Investments’ $2.9 billion Select Gold Portfolio fund. “The managements and the boards of the gold companies really have no one to blame but themselves for some of the negative sentiment and disappointment.”

Earnings statements had previously carried so-called cash costs, based on a standard developed in the 1990s that excludes expenses such as exploration and waste-rock removal.

Margin Compression

The 55-member S&P/TSX Global Gold Sector Index trailed gold each year in 2007 through 2012. The index declined 6.9 percent during that period while gold futures more than doubled. Gold fell 1.2 percent to settle at $1,595.70 an ounce today in New York.

Gold has advanced for 12 successive years, driven at least in part by demand from investors looking for a store of wealth amid concern about inflation. Despite benefiting from that rally, gold producers’ margins have come under pressure from rising prices for labor, equipment and raw materials.

The average cash cost of 10 of the biggest gold miners was $694 an ounce in the third quarter, 49 percent higher than in the same period two years earlier, according to data compiled by Bloomberg. The average gold price rose 35 percent in the same comparison.

“Everyone was trying to run through the funnel of building these new projects as big as you can, as fast as you can,” Kinross Gold Corp. Chief Executive Officer J. Paul Rollinson said in an interview Feb. 13. “There was huge competition for people, competition for steel, competition for tires and spare parts.”